Export subsidies unlikely to be reduced

The Economic Advisory Council to the Prime Minister has estimated that export recovery will be slower than expected at $168.7 billion (over Rs 7.77 lakh crore) in 2009-10. It also estimates imports to show significant improvement in the current quarter (January-March) and projects imports for 2009-10 at $296.8 billion (over Rs 13.6 lakh crore), which means that the projected merchandise trade deficit for 2009-10 is likely to be at about $128.1 billion (over Rs 5.9 lakh crore).

The Council has hinted at pruning the expenditure as one of the measures that can help contain the present unsustainable level of fiscal deficit, as most of the fiscal expansion in the current year has come on the expenditure side. The Council suggests starting the process of fiscal consolidation in the Budget, to be presented later this week.

The other major measures suggested by the Council include unification of the rate structure of the central value added tax (Cenvat) and service tax and peg it between the current and the previous higher level. It has also suggested widening the service tax coverage. These measures are the minimum expectations from the Budget.

Given the trade deficit figures, it is unlikely that any of the export subsidies will be reduced in the near future. At 9.8 per cent of the gross domestic product (GDP), the trade deficit is bridged only partly by estimated net invisibles of $98.6 billion (over Rs 4.5 lakh crore). Strong growth in remittances and recovery in services exports may continue and capital inflows estimated at $48.5 billion (over Rs 2.23 lakh crore) in 2009-10 may also turn out to be more robust next year providing more cushion. But, as the global economic outlook still remains uncertain with prospects of gradual withdrawal of stimulus in the developed countries looming large over the markets, it would be better not to rock the boat too much.

Even though the Economic Advisory Council is optimistic about economic growth at 8.2 per cent in the next financial year and expects a return to 9 per cent growth in the year after that, it is not all that positive about news from the developed countries.

It says that developed countries have come out of recession but it is a weak recovery with downside risks to growth. Second, financial markets are nervous about fiscal sustainability with massive increase in risk aversion quite a possibility. Finally, budgetary positions in advanced economies are worsening.

Under the circumstances, it is better to let the exporters keep what they have by way of subsidies. Many exporters are nervous that if the rupee appreciates further, it would be difficult to achieve the target of 15 per cent growth in exports in 2010-11 that the Commerce Minister set while unveiling the Foreign Trade Policy 2009-14.

Most exporters expect the coming financial year to be tougher than the year gone by, with inflation and a strengthening rupee making them less competitive in a tougher global market and the government relatively less well placed to give more subsidies.

The best way forward for the commerce ministry is to work closely with the finance ministry and other ministries to find ways and means to cut the transaction costs that exporters have to suffer. The first step could be to have a close look at the Customs notifications that were issued after the Foreign Trade Policy was announced. The next step could be to have a closer look at the Foreign Trade Policy document itself to identify several provisions that create uncertainty and unnecessary paperwork.

Email: tncr@sify.com